Compulsory Acquisition
Compulsory acquisition — also called a squeeze-out — is the mechanism under SEBI's Delisting Regulations 2021 by which an acquirer who has reached 90% or more of total shareholding can compulsorily acquire the remaining shares from minority shareholders at a price determined by the regulations, thereby completing the delisting process.
The compulsory acquisition mechanism, sometimes referred to internationally as a 'squeeze-out,' addresses the situation where an acquirer has accumulated an overwhelming majority of a listed company's shares and a small residual minority remains. In India, the relevant threshold is 90% of total voting rights or total shares. Once an acquirer — through a combination of pre-offer holdings, creeping acquisition, open offer, or other purchases — crosses and holds 90% of a listed company, the regulatory framework enables (and in some cases requires) the delisting of the company and the compulsory purchase of the remaining minority shares.
Under SEBI's Delisting Regulations 2021, when an acquirer reaches or crosses the 90% threshold, the acquirer is required to make an exit offer to the residual shareholders at a specified price. The minimum price for this compulsory exit offer is determined by the higher of the book value, the fair value determined by an independent registered valuer, or the price at which the acquirer made the open offer, or the average price at which the acquirer acquired shares from the secondary market over the relevant period. SEBI's 2021 Delisting Regulations introduced changes to simplify the process and provide greater certainty of pricing, partly in response to criticism that earlier regulations left exit prices uncertain and sometimes inadequate.
The rationale for the 90% threshold is derived from the Companies Act 2013 (Section 235), which allows a company to compulsorily acquire shares from a dissenting minority after a merger or scheme of arrangement has been approved by 90% of shareholders. SEBI aligned the delisting threshold with this legal concept. The legislative intent is that once a company is 90% held by a single entity, it effectively operates as a private company, and public listing serves no meaningful capital formation or price discovery purpose. The residual minority, while protected by the compulsory exit price mechanism, effectively loses the right to hold shares in a listed company.
For minority shareholders in a company where an acquirer is approaching the 90% threshold, the compulsory acquisition represents both a risk and an opportunity. The risk is that the offered exit price may be lower than the shareholder's cost of acquisition or their estimate of intrinsic value. The opportunity is a guaranteed liquidity event at a regulated minimum price in a company that may otherwise have low trading volumes. Historically, debates arose in India about whether the regulated minimum pricing formula adequately captured the control premium that should accrue to the minority in a change-of-control situation. SEBI revised the delisting pricing framework multiple times to address such concerns.